Failing to Rebalance Your Portfolio Could Cost You - Here's How Much

Having a rising portfolio may feel like a good situation to find yourself in. But sometimes the biggest investment risks develop during the best market environments. That's what many investors may be facing today.

If you've been following a long-term retirement plan, strong stock market gains may have quietly altered your portfolio without you realizing it. What once looked like a balanced investment strategy could now carry significantly more risk than you originally intended.

The reality is that difference can become expensive if markets go down.

Portfolio drift happens faster than many investors realize

Most investors choose a target allocation for a reason. A classic example is a 60% stock and 40% bond portfolio. That mix seeks to balance growth potential with stability, helping investors participate in market gains without taking excessive risk.

But markets don't stand still. For example, according to S&P Dow Jones Indices, the S&P 500 returned 25.22% over the past year. Left untouched, a portfolio that started near 60% equities and 40% fixed income (a 60/40 split) could have drifted closer to 65% equities and 35% fixed income (a 65/35 split) by the end of the year simply because stocks outperformed compared to previous years.

So an investor may not have consciously chosen more risk. The market ultimately chose it for them.

The hidden concentration risk may be even larger

Portfolio drift isn't only about stocks versus bonds. It can also create concentration in a handful of companies.

It's reported that the "Magnificent Seven" technology stocks — made up of Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta — generated roughly 44.1% of the S&P 500 Index's earnings growth and about 54% of its price gain in 2025, despite representing only about one-third of the index's market capitalization.

That means many investors who simply owned broad index funds may have become increasingly dependent on a relatively small group of companies continuing to outperform.

Why this matters more near retirement

For younger investors, an overly aggressive portfolio may not create immediate problems. For retirees and near-retirees, the stakes are certainly different.

One of the biggest risks in retirement is known as sequence-of-returns risk. This happens when poor market returns early in retirement permanently damage a portfolio because withdrawals lock in losses and leave fewer assets available to participate in future market recoveries.

So a portfolio that unintentionally drifted from a 60/40 split to a 65/35 split or beyond may experience larger losses during a market downturn than an investor anticipated. That's where rebalancing can become especially important.

Rebalancing may mean doing the opposite of what feels natural

The mechanics of rebalancing are surprisingly simple. If stocks have grown beyond their target allocation, investors sell a portion of those holdings and move the proceeds into fixed income assets such as bonds, cash, or other investments. The goal is to restore the portfolio to its intended risk level. Emotionally, however, this can be difficult, especially if equities are surging.

Most investors naturally want to buy what's rising and avoid what's lagging. Rebalancing requires the opposite discipline — trimming winners and adding to areas that haven't performed as well to limit market exposure.

Tax rules make planning easier than before

Some investors may avoid rebalancing because they worry about taxes. Fortunately, retirement accounts offer an important advantage. Rebalancing inside traditional IRAs, Roth IRAs, and 401(k) plans generally does not create an immediate taxable event because trades occur within the account.

Taxable brokerage accounts require more planning. The One Big Beautiful Bill Act (OBBBA) permanently extended the long-term capital gains tax structure established under the Tax Cuts and Jobs Act (TCJA), preserving the 0%, 15%, and 20% capital gains brackets. 

Additionally, the income thresholds that ultimately determine which capital gains rate applies to you will now be indexed for inflation. That gives investors more certainty when planning multi-year portfolio adjustments.

So while taxes should still be considered, they shouldn't prevent investors from managing risk appropriately.

A simple framework can help investors stay on track

It's generally recommended to review asset allocations at least annually. Another common approach is threshold rebalancing, which involves taking action whenever an asset class drifts more than five percentage points from its target allocation.

What's most important here is preventing a temporary bull market from quietly transforming a moderate-risk portfolio into an overly aggressive one, especially as you near retirement.

Bottom line

Portfolio drift rarely announces itself. It develops gradually, often during periods when investors feel the most confident because account balances are rising.

That's why rebalancing remains one of the simplest risk-management tools available. Taking time to review allocations, trim positions that have become oversized, and restore your intended mix could help protect your portfolio and prepare yourself financially for when the next market downturn inevitably arrives.

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